Archive - Oct 29, 2012 - Story

With equity cash and futures markets closed, we thought it useful to gauge where equities might have closed if they were trading. As so many need month-end marks for reporting and OPEX-based hedgers are likely anxious, we thought getting some perspective from what the machines are seeing would be useful. With Kevin Henry gone gray as Treasuries closed, risk-assets slipped modestly on the day - with a late day push to the lows on the back of Merkel's 'nein' on euro-bonds. To wit, based on the dependence with FX and commodity markets, S&P 500 futures would be trading under the critical 1400 level. - and based on the Toronto Stock Exchange, S&P 500 cash would be trading around 1404 (down around 8pts on the day). S&P futures are set to re-open at 1700ET 1800ET (and based on CME's site will close again at 0915ET tomorrow).

Through a wider looking glass, apart from Gold, commodity prices remain mostly driven by economic cycles rather than central bank actions. The correlation of Gold with Central Bank balance sheets remains the dominant theme as it grows in substance as a true global currency and a hedge against money debauchment. Since September’s coordinated easing from central banks, commodities have turned in mixed performances (-5% for oil, -3% for metals). The direct impact of monetary policy on industrial commodity prices appears very limited today (contrary to the situation during QE2 period), given the bleak global economic outlook and the absence of aggressive easing from China.

UPDATE: New York City officials order evacuation of upper floors of several buildings near site of partially collapsed crane.

While we are still hours away from "Peak Storm", the structural casualties are already adding up.  FDNY reports a 2nd alarm alert at the soon-to-be tallest residential building in Manhattan - 157 West 57th Street (aka One57, where recently a record price was paid for a duplex apartment) entailing a dangling crane. The area is being evacuated - to somewhere we assume that does not have cranes (good luck finding that). The critical question for Steve Liesman remains - how much more is a 'broken crane' worth to GDP than a 'broken window'? Live stream embedded below...

The actions of the world's central banks, from driving rates to the limit or beyond ZIRP into the unconventional moeny-printing (or more acquiescent QE), there is little doubt that the currency wars are under way. As SocGen notes, the spillovers from advanced economies' actions (exporting inflation) into EM currency appreciation create subsequent needs for EM bank actions at times when inflationary concerns remain high. With the Yuan at 19 year highs and suffering from outflows, the potential for QE-based inflows this time could be welcome by the CCP.

Con Ed's SVP John Miksad just hosted a call with some relatively ominous comments. As they expect record outages from wind and rain damage, it is the tides and the flooding that is of most concern as the executive noted that they may cut power to Brooklyn and Lower Manhattan if tides reach forecast ranges:

*CON ED EXPECTING `RECORD' OUTAGES FROM WIND, RAIN DAMAGE :ED US
*CON ED MAY SHUT DOWN LOWER MANHATTAN SYSTEM DUE TO HIGH TIDES
*CON ED: `NOT OKAY' IF TIDES REACH FORECAST 10-12 FOOT LEVEL
*CON ED: 6,500 NYC BUILDINGS, 2800 BROOKLYN CUSTOMERS AFFECTED

Flood surge map and power outage links below...

Hurricane Sandy will negatively impact traffic and retail sales in the retail calendar’s November Week 1. Week 1 is historically ~22.4% of Nov’s sales and Citi's Retail analysts estimate traffic could be down ~40% for the week in negatively impacted areas. They calculate that Sandy could negatively impact November monthly comps by 2-3% based on 22% (Wk 1 mix of month) * -40% (Citi traffic/comp headwind assumption) * 24% mix (average mix of stores impacted). A negative impact of 2-3% in November would yield a negative quarterly impact of ~1-2%.

The Fed sees the need to reduce interest rates as it takes over the US Treasury and MBS markets; but the ECB's actions are more aimed at reducing divergences between peripheral nations and the core. As SocGen notes, it remains unclear how and when the Fed would exit this situation and in Europe, bond market volatility remains notably elevated relative to the US and Japan as policy action absent a political, fiscal, and banking union remains considerably less potent.

The details of the Spanish bad bank are being released and it is ugly - far uglier than many had expected. And while the Spanish government expects priovate interest to take some of this massively discounted 'crap' off their hands, we have three words: 'deleveraging' and 'no bid!'.

• *RESTOY SAYS BAD BANK AIMS TO BE PROFITABLE
• *SPAIN BAD BANK TO DISCOUNT LOANS AVG 46%; FORECLOSED ASSETS 63%
• *SPAIN AIMS FOR BAD BANK NOT TO COUNT TOWARDS PUBLIC ACCOUNTS
• *SPAIN TO DISCUSS BAD BANK WITH INVESTORS IN COMING DAYS
• *SPAIN BAD BANK TO INCLUDE FORECLOSED ASSETS, LOANS, STAKES

The Spanish government remain in a world of their own with this level of self-delusion. Discunt details below...

Will the president preannounce the epic surge that Sandy will bring to Q4 GDP as America fails upward to achieve the Keynesian utopia through an infinity of broken windows - a hurricane that CNBC's Jim Cramer called a "GDP event", or merely an opportunity to take more shots... Find out below.

Follow this simple chronology of events...

UPDATE: Apologies - Europe clocks went back so we have another hour of trading (and stocks are surging!)

European equity markets are all closing down today with Spain leading the laggards down over 1% on the day. This is the seventh down day of the last eight for Europe's equity markets. Spanish bond spreads are wider for the sixth day of the last seven and now almost 60bps off their post-Draghi tights as once again the fast-money front-runners step away leaving a truer picture of the state of Europe. Interestingly, Italy underperformed Spain (in bond-land) today - something we haven't seen in weeks - which appears to be Italian bonds reverting their exuberance back to Italian stock levels. Notably, just as in the US, broad European stocks pushed a little higher into the close (after US early close) while credit markets bled weaker - closing near their worst levels of the day. EURUSD was down 30 pips or so (with an 80 pip hi-lo swing) - hovering around 1.29 - until it decided to zoom into the last few minutes, which pinged stocks a little.

Fed 'credibility' has boosted stocks from the start of its actions; the ECB, however, only since OMT. But as SocGen's cross-asset class research group notes, poor performance of the S&P 500 since QE3 announcement (-1.6%) may well be an initial sign of a loss of impact from the Fed’s policy, and US equity volatility is rising - catching up to Europe's.

"The sale of Treasury securities that was tentatively scheduled for today, Monday, October 29, will take place as scheduled, with a 10:15 AM open and 11:00 AM close.  However, settlement will take place on Wednesday, October 31, not Tuesday, October 30.  The purchase of Treasury securities previously scheduled for tomorrow, Tuesday, October 30, has been postponed, and the schedule of Treasury security operations will be updated in the coming days with details of the rescheduled operation.  After today's sale, Treasury purchase and sale operations are anticipated to resume on Wednesday, October 31.  Similarly, there will be no agency mortgage-backed securities (MBS) trading on Tuesday, October 30.  MBS trading operations are anticipated to resume on Wednesday, October 31."

Remember the wetsuit purchased many years ago for that trip to Hawaii and never used once? It may be time to find where it is and clean it up, as "escaping from New York", in a worst case scenario is getting so problematic, swimming through the Hudson or East Rivers may soon be the only option. Moments ago, in a press conference, Andrew Cuomo reported that while the storm is behaving as predicted, as of 2pm today both the Holland and Brooklyn Battery tunnels will be closed. And if these are down, the Lincoln and Queens-Midtown can't be far behind, especially if the flood continues as expected.

Since the rumors and news of the Sovereign CDS ban began in Europe (due to officially be in place next week), sovereign CDS spreads (and their gross and net exposure) have been crushed. This would seem like a good thing for all the standard CDS-haters and speculator-blamers who believe that Europe's problems were 'caused' by these mean credit traders; but bonds haven't followed. Bonds have rallied but this is more consequence of front-running Draghi's OMT than CDS compression. The concern is, should we see a risk flare, the CDS market (and its basis traders) will not be there this time as a natural buffer (or protection provider) this time. Exactly as we noted here, the unintended consequence of regulating away the CDS market will be higher costs of funds as real-money will be considerably more risk averse in an unhedgeable event risk market - and we are already seeing exactly this in Spain.